October 10, 2023
It’s the Process, not the Market Forecast the Matters
We are over one year removed from receiving an inverted yield curve, thus elevating the risks to the economy and potential impacts to the trend in the stock market. Many wonder whether we will have a recession or how on a macroeconomic level the markets could be affected by an upcoming election, or a myriad of other hypotheticals.
Central to answering these questions is our investment process that is rooted in aligning our portfolios with bull and bear trends, which is to say managing risk in windows with elevated drawdown probability while keeping you invested when the uptrend persists. In short, headline news or macro-economic forecasting plays a very limited role in our tactical approach to investing.
Most investors want cause and effect explanations for market movements and therefore attempt to study economic supply and demand factors that they believe underlie market values. They rely on government policy, economic projections, price-earnings ratios, and balance sheet analysis to make buy and sell determinations. But at its core, big market movements and long-term market trends are based on persistent disproportionate money flows (more buyers than sellers and vice versa) regardless of the macro source or news that is driving those flows. So, rather than try to anticipate future market movements by forecasting the macro environment, our investment process seeks to identify money flow trends and position our portfolios to align with it in either direction.
One common indicator to identify trends is the rolling average of past prices called a moving average. If current prices are above this average, then the trend is bullish and if below, then bearish. So, if a bearish macro call turns out to be correct and the market falls 30+%, well guess what? Market indices will deteriorate, and the index will trade below the moving average, indicating a change of trend and we therefore would expect to sidestep most of the decline based on our process of identifying trends or trend changes. If those bullish or bearish events unfold in a meaningful way, our process will capture it by identifying the change in money flows and realigning our portfolios accordingly.
To summarize, the market is a discounting mechanism and money flows will provide evidence that either the trend is to continue or that the trend may change. The focus is not to predict what might occur because of a macroeconomic event that unfolds. Our investment process is the guiding principle; it is intuitive and repeatable in any market trend. The main goal is to be on the right side of a market trend. Avoid large drawdowns that negatively impact the financial plan and participate in long-term uptrends.
Has your current financial advisor discussed an investment strategy that aligns with your financial plan and objectives? There should be a clear and understandable process involved with these conversations. If you have an interest in discussing investment strategies offered through Gainplan, schedule a meeting with one of our relationship managers.